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Prognostications about the future of the investment advisory business suffer from the fate of all predictions: None of us can reliably predict the future. Well-reasoned opinions range from “doom and gloom” to very optimistic.
Ultimately, this is clear: Firms that demonstrate “value” will always have clients willing to pay a fee reasonably related to that value. It may not matter whether it is a flat or AUM-based fee. But it remains my view that the AUM-based fee has a troubled future.
The changing concept of “value”
When I started as an advisor, “value” was premised on the ability to put together an appropriate portfolio. The standard fee was 1% of AUM.
DIY investors can now put together a globally diversified portfolio with each of the six major asset classes for less than 0.06% a year. According to Matt Hougan, who assembled that data, “The portfolio provides exposure to more than 4,600 stocks in 47 different countries, over 3,100 bonds, dozens of currencies and 22 different commodities.”
“Value” for most firms is no longer defined solely as investment management. Fees will be strongly influenced by the modest cost of implementing a sound investment strategy without using any advisor, and the lower fees charged by robo advisors (both online and hybrid).
The new definition of “value”
A recent article in The New York Times profiled Creative Planning, a $26 billion investment advisory firm based in Leawood, Kansas. The article extolled the firm for providing totally objective, non-conflicted advice.
Part of its impressive growth was attributed to its ability to offer its clients “more complex, less liquid investment options,” while noting the majority of its clients are invested in “passive investment vehicles.”
If that were the total story, it wouldn’t explain the success of Creative Planning. Every Registered Investment Advisor is a fiduciary to their clients. They all provide independent, objective advice.
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Here’s what makes Creative Planning different. Take a look at this page on its web site, which sets forth its “points of differentiation.” Most of these items appear (or could appear) on the web site of any Registered Investment Advisor. But here are some that are unique to Creative Planning:
- Your advisory team consists of a Certified Financial PlannerTM professional (CFP®), a Certified Public Accountant (CPA) and an estate planning attorney.
- Financial planning, estate planning, investment management and risk management are coordinated in house.
- Your estate planning documents are reviewed by a legal affiliate that has drafted over 12,000 estate plans.
- Financial plans and legal documents are delivered within one week.
Creative Planning is much more than an investment management firm. It invests your money, prepares your taxes and drafts your estate planning documents. When you meet with them, you aren’t just meeting with your advisor, but also with your accountant and estate-planning attorney. And it claims to offer these services for overall fees “less than the average mutual fund.” From my personal experience with the firm, its fees are based on a tiered-AUM structure. They are competitive with those of other advisory firms, who offer less comprehensive services.
At the higher end of the spectrum, Creative Planning reflects the new definition of “adding value.”
There’s plenty of opportunity to demonstrate value between the DIY investor and the comprehensive holistic wealth management offered by Creative Planning. But these two extremes bookmark fees.
If the basis of your value proposition is investment management, the perceived value of your service has been sharply reduced. If you offer more comprehensive wealth management, but less than Creative Planning, it will be difficult for you to charge more than it does. It’s also likely some of your clients will pressure you to add more services so they can have all their financial issues handled in one place. It will be challenging to accommodate this request.
Firms that recognize the changes in our industry and plan for them will survive and thrive.
Dan Solin is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read. His sales coaching practice has expanded to include advisory firms throughout the world. Dan is not affiliated with any advisory firm.
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